Why Put Capitalism on Trial?

This past Friday, the STA Money Hour economists talked about Capitalism on Trial. Usually their radio show is about managing your investments and retirement, so this seemed different and caught my attention.

Luke Patterson was doing most of the talking; along with him was Max Gaines. Patterson started this segment by pointing out that we have nearly 16 million new eligible young voters, who were not old enough to have voted in 2016, the last presidential election. What is on the mind of these new voters?

Not the stock market, not tax cuts, and not deregulation, but rather things like climate change, and income inequality, and forgiving of student loan debt, and more free stuff.

If even half of these voters show up to vote, that could be a problem for Donald Trump. And the alternative—all of them: Warren, Sanders, Biden, even Buttigieg—are extreme (what he calls left, and what is southern statist tyranny on the Spherical Model) and open about their socialist plans.

The economic sphere is the center of the discussion this election. As he puts it,

Profiteering, capitalism, free markets are absolutely on trial—I think fundamental this election. The way of life in the United States I think is also on trial—what we want, and how we want to do things.

So, Patterson goes ahead and makes the case for capitalism. He sets up the defense with this information about what capitalism has done for the United States:

There are now 46.8 million millionaires around the world. That’s up 1.1 million from mid-2018. That’s according to a report released this week by the Credit Research Institute. Thanks again to the value of both financial, like stocks, and non-financial, like real estate assets. The report reveals that there are a lot more millionaires—again totaling 46.8 million millionaires around the world.

From the Credit Suisse Research Institute
Global Wealth Report 2019, p. 11

You’ve got the United States that’s a big part of that. About 25% of the global market capitalization, and the United States is the millionaire capital of the world, according to this report. This year the United States extended its unbroken spell of wealth gains, which they say began after the global financial crisis of 2008. The country now accounts for 40% of dollar millionaires worldwide and 40% of those in the top 1% of global wealth distribution.

The United States, and its system, makes a lot of millionaires. A lot of wealthier people.

This is just the beginning point. The opposition might even say this is a bad thing—creating more inequality, because they don’t understand wealth creation and they think someone gaining wealth means they’re taking it from someone poorer. So there’s more education to do to defend capitalism. Here’s more from the radio broadcast on how US wealth creators compare to other countries:

Luke: And on a per capita basis, there is no country even close. Not even China. Not even close to the United States. They are so distant in second, they’re not even second.

logo found here

What’s more, the biggest gain in the number of millionaires this year comes from—I’ll give you two guesses, Max. Is it Denmark, Switzerland, someplace in Western Europe, China? Gaining the most millionaires this year, with all those people, with a 6% annual GDP growth? Is it China that is creating the most millionaires? Who do you think it is? Western Europe? China? Gaining the most millionaires this year? With all those people, with a 6% annual GDP growth? Is it China that is creating the most millionaires? Who do you think it is?

Max: You’re putting me on the spot.

Luke: I think you know the answer. Give it to us.

Max: I’m not going to say Denmark.

Luke: No. No, you won’t. But it’s the economic system that’s being, I think, promoted by many on the left, as sort of the system to aspire to, the Western European style system.

He’s tells us the answer eventually. But first he’s making clear how the opposition is characterizing capitalism:

Again, capitalism, profit taking, and corporations, and billionaires especially are evil, and our system broken, and so it should be eliminated and rebuilt under a socialist system. That’s what they’re advocating for.

They don’t even apologize for it anymore. It’s not something that they’re saying, well, you know, it just needs to be tweaked around the edges, improve the capitalist system, or make better the things that need improving. They’re not saying any of those things. They’re saying, Listen, this thing is broken. It’s rotten from the inside. It has to be eliminated and criminalized, called out for being evil—to rise up, squash it, and rebuild under a socialist system.

Here’s the essential information, and the answer to his quiz question:

But, as it stands, according to this data, the biggest gain in the number of millionaires this year comes from none other than the United States, which added 675,000 new millionaires in the past year. 675,000 of the 1.1 million.

Hear me on this. This exceeded the extra newcomers in the next nine countries combined.

So, the United States created, this year, 675,000 new millionaires. This exceeded the next nine countries combined: Japan, China, Germany, The Netherlands, Brazil, India, Spain, Canada, Switzerland.

Let’s let that set for a moment. And repeat it. The number of millionaires created in the US this past year exceeds the number of millionaires created in the next nine countries combined. That’s not a small difference.

But, so what if capitalism creates millionaires? Shouldn’t they just feel guilty for that? Don’t we need fewer billionaires and millionaires? Unfortunately, the opposition believes that.

As Patterson says,

So capitalism is on trial. You’ve got Elizabeth Warren. She proposed the Accountable Capitalism Act (nice word), which obliges large corporations to obtain a federal charter requiring directors to consider the interests of all stakeholders—not only shareholders and customers, but also groups representing societies, such as their employees, local communities, civil society, including non-representative anti-business NGOs.

The Chief Justice of the Supreme Court of Delaware—where, by the way, more than two-thirds of the Fortune 500 corporations have their legal home—has written a book arguing that corporations should be run for the benefit of their workers. The Financial Times also launched a new agenda: “Capitalism: Time for a Reset. Business must make a profit, but should serve a purpose too.”

People are buying into this nice-sounding irrationality. He adds,

In a recent letter by the Business Roundtable, 181 corporate CEOs disavow the profit motive. The corporate directors, accountability shareholders, the CEOs champion a new view now widely held by them. It says that profit could only be justified for virtuous conduct, that profit should merely be a byproduct of making certain contributions to society. It’s a proposition that the Business Roundtable already implicitly accepts.

So there’s the central debate question: shouldn’t making contributions to society be a higher value than making a profit? Patterson makes this assertion:

In fact, the profit that a business earns is a pretty good approximation of its contribution to society. One might think of it in terms of a simple equation: revenue (what people pay in a competitive market) minus cost (the value of resources used to provide a product or service) equals profit—which is a first order indicator of a business’s contribution to society.

Here's the equation more visually:

revenue – cost = profit

Profit isn’t bad. As Patterson says, “profit is one of the most powerful signaling devices in the free market.”

Back in 2013 I was taking an online Hillsdale College class on economics, and also reading Poverty of Nations. So I wrote a number of economics pieces, for example, here, here, and here. Professor Gary Wolfram, the Economics 101 teacher at Hillsdale, had pointed out that the decentralized free market system makes it possible for the market to prepare and provide what he wants to buy his wife for her birthday even before he has thought about it. It’s amazing. The wide variety of choices, at costs we’re willing to pay (exchange for the fruits of our labor) are far beyond what is available practically anywhere else in the world. He also said—and I’ve heard others point this out as well—capitalism is based on providing goods or services to people—to serve others. The only way to make a valuable exchange is to think about what will make the customer so pleased that they are willing to exchange their own profits (the fruits of their labors) for whatever it is you’re offering them.

Back to the defense of capitalism. Here’s Luke Patterson again:

In their search for profit, businesses create the dynamic for economic growth and prosperity, rising living standards. Is this not a contribution to society of the most dramatic kind imaginable? The contribution to society, the profits making people wealthier, bringing more people out of poverty? Is that not a contribution to society?

He later goes into some detail about estimates of costs surrounding Medicare-for-all, which is just one of the promises of “free stuff” that Elizabeth Warren fails to show how she will pay for. She says she’ll never take from the middle class. But studies show there isn’t enough wealth in the upper class to take from to pay for this giveaway, which takes profits, and even prices, out of the equation.

Here’s what we can know for sure: the free market creates wealth. It doesn’t just move money from some people and place it in the hands of others; it creates actual wealth—new surplus resulting from work. The free market has indeed lifted more people out of poverty than any other system.

It’s not just luck. It’s not just “Well, things are going OK for now, but that can’t continue.” It’s not just, “Sure, socialism has failed every time it’s been tried, but it just wasn’t ever done right.”

I know, for certain, that I am a better expert on what kind of healthcare I am willing to pay for, what foods I’m willing to buy, what kind of transportation will meet my personal needs—or anything else we make payment exchanges for—than some bureaucrat in a faraway office.

Prosperity requires the freedom to make those exchange decisions for ourselves. The person who earns the wealth should be the one to decide how, when, and whether to spend it, save it, or invest it. Any path that allows anyone else to make that decision leads to poverty.

So, when we’re talking economics with young people, we need to make sure that, if they insist that they care about the poor (which they think might include them), we let them know the way to lift the poor is more free market, combined with careful philanthropy—not more government control.

Playing Monopoly

As a game, Monopoly can be a good (or long) several hours of family fun. We have fond memories of playing it when son Political Sphere was close to age five, still most of a year before kindergarten, and he had figured out how to make change and volunteered to be the banker. I know; I’m sort of bragging. But, really, there was a lot of entertainment value in having smart kids.

In that game the goal is to get more and more property, so you can command the highest prices possible and eventually force everyone else to go bankrupt. It has a 1930s Depression feel about it.

So, I’m looking at a similar goal this week, watching one of the largest three oil drilling equipment companies buy out another of the top three.

Negotiations have apparently been going on for a while, but news leaked last Thursday about the possible buyout of Baker-Hughes by Halliburton. Halliburton was already very big at number 2 worldwide. Baker-Hughes was probably third largest, but combined with Halliburton, they eclipse the size of number 1 Schlumberger (a French company, pronounced here in Texas something like Shlum-ber-zhay).

This morning the news came out that the deal was going through. Halliburton is paying around $34.6 billion for their fellow American company, along with some stock payments for employees. Last Friday stock prices were up a bit for both companies. Today, Halliburton is down 10 points and Baker-Hughes is up 10 points. I don’t know what that means, other than stock watchers think the price was good for Baker-Hughes and probably higher than Halliburton had wanted to pay. As far as I can tell, nothing illegal has taken place. Anti-trust examinations are still to come.

So that’s the free market at work, right? Only partly. Free enterprise is not actually a game of monopoly, in which the players have a goal or getting all the market share and putting all their competitors out of business. After all, competition keeps prices down for consumers and encourages innovation.

But competitors are kind of pesky for big businesses. And that’s why there have always been efforts to get governments to regulate in ways that give an advantage to the bigger, more established businesses, making market entry more difficult—thus limiting competition.

It was just a few days ago that I quoted economist Milton Friedman saying:

[Businesses] aren’t promoting free enterprise when they ask for handouts and regulations and controls to avoid competition.

The two greatest enemies of free society are intellectuals and businessmen—for opposite reasons. Intellectuals want freedom for themselves but no one else. Businessmen want free enterprise for everyone else, but special consideration for themselves.

I don’t have any data showing particular favors either Halliburton or Baker-Hughes has been involved in. I’m not a hater of either company just because of size. But I am puzzled—as a lover of free enterprise and civilization—with the monopoly game playing of big business in general. Why would it be a goal to grow endlessly? Why isn’t there a perfect size for any particular organization? Is bigger necessarily better?

The companies seem to see benefits from the merger. But there are concerns. One of the things that tend to happen following mergers is that shifting and settling occurs. Where there are redundancies, the acquired company employers are the ones likely to be let go. So it’s hard for regular people to understand what the CEO means when he announces that they always put the employer and shareholder interests first.

Baker-Hughes had been having a good year. Halliburton has as well. Both were facing an industry with lower oil prices right now, because OPEC saw the need to flood the market, in the face of growing supply out of North Dakota and Texas, to discourage further drilling. But OPEC can only drop prices for so long without harming themselves. As long as drilling is happening anywhere in the world, both of these big companies were there making money. So, it wasn’t any great need on the part of Baker-Hughes that led them to enter into the negotiations in the first place.

In general, in a free market, businesses ought to be free to hire and let go employees as they see fit. But, because success of free market is intertwined with living the laws of civilization, there should be some concern for the individual employees as well. If that perspective is lost because a company gets too big, loses sight of people and culture, and focuses only on bottom line growth, then that company might be too big.

Should government have a role in making things safer/better for employees in such a merger? It’s tempting to say yes. The employees have been hard working and loyal, and the company is failing to be loyal in return. Shouldn’t we, the people, see to it that employees aren’t taken care of as we think would be fair?

Yes and no. This situation isn’t very different from people who think we, the people, ought to force companies to pay a minimum wage. The outcome of forcing a particular contract between employer and employee is the failure to enter into a contract that doesn’t benefit both parties. So what happens is that unemployment goes up, and those who could be getting experience while earning low hourly wages are left unemployed. Our interference harms rather than helps, despite our good intentions.

So, what would be nice is that these big corporations, when they face redundancies, they think less about numbers and more about people. They could consider a longer severance package, for example.

The experienced cynics among us might ask, What if we know those companies just won’t do it; shouldn’t they be forced to give a longer severance package? Wouldn’t that at least make them think differently about the balance between keeping and laying off any particular employee?

I don’t know. It looks good, to voice the intentions this way. But what we need is a world in which the company leaders actually think about culture, loyalty, and human factors as a higher priority to short-term numbers. We need them to be more civilized. Without the heartfelt movement toward civilization, there will always be unintended consequences, probably opposite of what we want to have happen.

Freedom, prosperity, and civilization are tied together. You don’t get actual long-term prosperity without laws that allow as much freedom as possible, and without people who choose to live civilized lives. So the best outcome to pray for, after a big upheaval for thousands of people, such as this merger is about to cause—is for the hearts of more and more people, preferably those in leadership positions where policy decisions are made, to be turned toward accomplishing human good, and trusting that will lead to greater prosperity.

Collectivism vs. Capitalism

Back in late March to early April of 2011, just a month into writing this blog, I wrote a series called “Anything Evil about Capitalism” parts I, II, III, and IV. (The first two define the terms wealth and capital, to prepare for making moral judgments in the third. The fourth is to additionally address inherited wealth. These ideas review portions of the Economic Sphere portion of the Spherical Model.) Over the weekend I watched last Friday’s episode of the Glenn Beck TV show that supported the assertion that capitalism is moral. Rabbi Daniel Lapin was the guest teacher wielding the chalkboard. So much of it was clear and sensible, I wanted to share it. [To see the video requires a paid subscription, but it's the first hour of Friday, April 26, 2013.]

Rabbi Daniel Lapin on Glenn Beck show, 4-26-2013
(note: erasing "freedom" and replacing with "$" was part of
the discussion, not the actual formula)

He also starts with defining terms, specifically defining collectivism and materialism, to prepare for making a comparison with their opposite. Here’s a part of the conversation:

Rabbi Daniel Lapin: We’ve been talking about collectivism, a whole lot. It’s one of the favorite words of the left side of the political spectrum. And I thought it would be helpful if we identify, first of all, what they say it is, and then what it really is.

Collectivism is, as it’s usually defined, as any kind of political, or social or economic philosophy that stresses our interdependence with one another. You and I agree with that. We couldn’t live without each other. We know that; we understand that.

Glenn Beck: Yeah, no man is an island.

Rabbi Lapin: We get it. That’s not what collectivism really is. What collectivism really is is a formalized, deliberate structure…deliberate attempt to create a moral matrix to legitimize taking things from one group of people and giving it to another. That’s what collectivism is all about. It’s essentially finding a framework of virtue about stealing.

He goes on to say that the “manure” that fertilizes the idea of collectivism is materialism, “the fundamental conviction that nothing that isn’t material matters in the world.”

Then there’s a need for more definition:

Glenn Beck: Define materialism. Because in my own head I was thinking it was about having all this great stuff. But you’re talking about that there is no spiritual part of the world, that it is only the material make-up.

Rabbi Lapin: Well, I can actually call upon an expert from the left to define materialism, no less an authority than, you might remember, Willie Brown, former mayor of San Francisco, speaker of the California State Assembly. Now, I'll give you in almost exact terms how he defined materialism.… What he said is, “If I cannot eat it, wear it, drive it, or make love to it, I’m not interested in it.” That’s a pretty good definition of materialism. If I can’t actually see it, touch it, make use of it, exploit it, benefit from it in some way, it doesn’t exist. In other words, there is no such thing as love. There’s no such thing as loyalty. There is no such thing as awe. There’s no such thing as staring at the heavens in wonder or biting into an apple and just wanting to thank somebody for giving that to you. None of that is true, because it’s all just firing of neurons in your cortex and your spinal column. There’s no mystery in life; it is all thoroughly basic and scientific.

This discussion of materialism clicked a lot of understanding of the enemy mind, connections I hadn’t made before. I expect some of that will come up in future posts. But this post we’re mainly limiting to the morality of making money. The definition discussion prepares us for the blackboard instruction. It contains this chart, which he then explains:

 

While he’s discussing that first line, he gives one of the best definitions of capitalism I’ve heard, and that’s what caught my attention.

Rabbi Lapin: If materialism and collectivism encourages competition about being a bigger victim, what does this [making money] philosophy engender? Competition to provide service. How beautiful is that! It’s figuring out, to recognize that you will succeed best at making money if you are obsessively preoccupied with supplying the needs of your fellow human beings.

In referring to Bill Gates and Steve Jobs, and the technological products they’ve provided, Rabbi Lapin says, “The money they make is testament to how many of God’s children they pleased.”

Which is better? Making wealth for your use by providing service to others, or requiring wealth from service providers to provide goods and services to someone who did not earn it? Clearly, the answer is making wealth through service is more moral.

But what about those who can’t provide for themselves? The best answer is for those whose love makes them feel responsible for the weaker members of society to provide for them willingly. And where those closest can’t do enough, then the caring larger public of service providers will offer help. I’m more willing to trust that goodness to a people whose goal is to find ways to serve than I am to trust a people who look for ways to take wealth from service providers.

The Case for the Free Market

Ezra Taft Benson

Yesterday a friend put up a link to one of those pieces that I read and think, “Why hasn’t this been in my files all along?” This time the piece is “The Case for the Free Market,” a chapter from the book This Nation Shall Endure, ©1977, by Ezra Taft Benson. I reference his “The Proper Role of Government” several times in my Spherical Model writings, and keep it filed with Bastiat’s The Law, which it cites several times. 

The article is worth spending a day summarizing. He teaches us with a parable of two fathers of sons:

Two fathers lived side by side as neighbors. Each had two sons. Each had a good job, a roomy house, and material means to provide the best of life’s luxuries. The essential difference between the two fathers was one of philosophy.

Mr. A’s objective with his sons was to instill principles that would bring about self-respect, personal responsibility, and independence. His method merits our scrutiny.

When his boys were young, he taught them how to work at simple tasks by his side. When they became more mature, he developed a work-incentive program. The pay scale was commensurate with the quality of the work performed. An “average job,” for example, paid fifty cents; “above average,” sixty cents’ “exceptional,” seventy-five cents. A “one-dollar job” was the impossible task, a goal that he soon observed the boys were striving after. [Mr. Spherical Model is convinced his grandfather used this same scale on lawn care and other duties he and his brothers were hired to do.] He impressed on them that the only limitations to their earnings were their own personal initiative and desire. He emphasized the necessity of postponing wants so they could save for the future. The lessons were well learned over a period of time.

There was an undergirding moral element to Mr. A’s philosophy, a principle more “caught” than taught. A simple example will suffice. One day the boys, now young men, were working in his plant. Mr. A observed some sloppy work being done on one of the products. He asked to see the product, and removed the label. One of the boys resisted. “Why are you doing that, Dad?” he asked. Mr. A replied, “I’ll not have my name attached to a shoddy product. When my name goes on, my customers must know I’ve given them my best workmanship. Would you want to own this product?” It was an answer that provided a lesson that would last a lifetime. How could the Golden Rule be emphasized more effectively in business!

“Mr. B also had a philosophy, albeit one that was reactionary to the early struggles of youth. “I’ll not have my kids go through what I did.” His philosophy was designed to remove the struggle from life. His method also merits our consideration.

Regularly his sons were provided with generous allowances. Little work was expected in their formative years. In later years the boys were encouraged to work, but now they were too comfortable in their security. After all, they had all their material wants satisfied. At this juncture Mr. B made a profound discovery: wants always exceed needs and are never satisfied unless disciplined. To counteract the lack of self-discipline, Mr. B embarked on a routine of imposed restraints. To his chagrin, he found his sons embittered toward him, ungrateful, and frequently disobedient to rules imposed on them.

The story is timeless. It is also instructive on a larger level, mainly the increasing expectation that government is there to provide for us, which is impossible—since government produces nothing—until government takes from a producer who earned his wealth and gives it to someone who didn’t earn it. Ironically, people sneeringly deride the free market as unfair and immoral.

In the interest of brevity, I’m going to include just a couple of lists. First, Benson gives the following crucial elements of the free market system (along with some explication that I’m not including here):

·         First: The free-market system rests on a moral base.

·         Second: The free market is based on the right to property.

·         Third: The free market is based on the right to enjoy private enterprise for profit.

·         Fourth: The free market is the right to voluntary exchange of goods and services, free from restraints and controls.

·         Fifth: A free market survives with competition. 

This next list is a logic equation, step-by-step showing why logically these principles apply to the free market, reduced to this formula: 

1. Economic security for all is impossible without widespread abundance.
2. Abundance is impossible without industrious and efficient production.
3. Such production is impossible without energetic, willing, and eager labor.
4. Such labor is not possible without incentive.
5. Of all forms of incentive, the freedom to attain a reward for one’s labors is the most sustaining for most people. Sometimes called the profit motive, it is simply the right to plan and to earn and to enjoy the fruits of one’s labor.
6. This profit motive diminishes as government controls, regulations, and taxes increase to deny the fruits of success to those who produce.
7. Therefore, any attempt through government intervention to redistribute the material rewards of labor can only result in the eventual destruction of the productive base of society, without which real abundance and security for more than the ruling elite are quite impossible.

Ezra Taft Benson was an outspoken opponent of socialism. He was appointed US Secretary of Agriculture in 1953, serving all eight years of the Eisenhower administration, all the while opposing the price supports and aid to farmers that came under his jurisdiction. He consistently encouraged adherence to the Constitution, and in people performing their civic duties with diligence and attention. 

If you aren’t aware of this brilliant man, you may not be aware that he served as president and prophet of The Church of Jesus Christ of Latter-day Saints from 1985 until his death in 1994. It was noteworthy that, while he was an outspoken political conservative all through his life, once he became the prophet, he spoke almost not at all on political issues. People had been worried (particularly those who disagreed with him, or those who feared those who disagreed with him) that he would use his worldwide position toward some political agenda. That simply didn’t happen.  

For anyone needlessly worrying that a Romney presidency would put the country at the mercy of the political desires of Mormon leaders, note that even a man as right, articulate, and motivated to protect our freedoms as Ezra Taft Benson was nevertheless maintained strict political neutrality as the worldwide leader. Not only would a Latter-day Saint prophet not press a US president or other elected official to act in a certain political way, a prophet would not even allow himself to speak politically. 

After four or five decades since these words were written, one surprising thing is seeing how much more they apply today. Maybe that is evidence of the truth of the principles of our founders. We don’t need to “progress” to some newer design for society; we need to live the principles that are most moral and therefore most liberating.

You can read "The Case for the Free Market" in its entirety here.